Taxation and Customs Union

Updated on July 18, 2022

What is VAT?

Value-added taxation (VAT) is a method used by the European Union to collect revenue from consumers by taxing the amount of money spent on the final product or service.

Almost all goods and services purchased or sold for use or consumption within the European Union fall under this umbrella.

Consequently, goods and services that are sold outside of the country are not subject to VAT.

Imports, on the other hand, are taxed to ensure that EU producers can compete on an equal footing with foreign providers on the European market.

The tax on the additional cost of goods and services is known as the

all commercial activities involving the manufacture and distribution of products and services are taxed under this basic rule There’s an exception, though, if the person’s annual turnover falls below a particular threshold (the threshold), which varies by Member State.

Because it is ultimately paid by the final consumer, it is a consumption tax. Despite the name, it is not a business tax.

This implies the tax burden can be clearly seen at every step of the production and distribution chain.

Taxpayers (i.e., VAT-registered enterprises) subtract the amount of tax they paid to other taxable individuals on purchases for their business activities from the VAT they have collected. No matter how many transactions there are, the tax will always be equal.

The “taxable person” is the vendor of the products, although the buyer actually pays the seller as part of the purchase price. In other words, it is a tax that is levied in the background.

Just why is VAT used by every EU country?

Cascade taxes were the most common form of indirect taxation in the initial six EU countries at the time the European Community was formed. Multi-stage taxes were imposed on the actual output value at each stage of the production process, making it hard to ascertain the actual tax included in the final price of a specific product. As a result, EU countries were constantly at risk of subsidizing their exports by an overestimation of taxes refundable on exporting, whether on purpose or by accident.

See also  Charging VAT on goods

Europe needed a neutral and transparent turnover tax system that guaranteed tax neutrality as well as permitted the exact amount of taxes to be refunded at the point of export in order to create an efficient, single market. Tax-free exports can be guaranteed by VAT because of its transparency and completeness, as mentioned in VAT on import and exports.

What is the method of charging?

A taxable person is entitled to deduct all taxes already paid from the sale price when calculating the amount of VAT that must be paid on a transaction. To avoid double-taxation, taxes are paid solely on the added value at each stage of production and distribution, thus avoiding double-taxation. Since each stage adds up to the ultimate price, each stage also adds up to each stage’s VAT, hence the total VAT paid equals the sum of the total VAT paid at each stage.

VAT-registered businesses are assigned a unique identification number and are required to display the VAT they collect from clients on their invoices. A registered trader who buys the product knows exactly how much he can deduct, and the consumer knows exactly how much tax he has to pay on the finished product. By paying the right VAT in phases, the system is able to self-police.

Example

Phase 1

A smelter buys iron ore from a mine. In this case, the mine charges its customers €1200 because the sale is worth €1000 and the VAT rate is 20%. If it had purchased €240 worth of tools, including €40 VAT in the same accounting period, it would owe €160 (€200 minus €40) to the government. The Treasury also receives the additional €40, bringing its total to €200, the right VAT owed on the sale of iron ore.

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Supply: €1,000

VAT: €200 for the supply

Purchases: €40 in VAT.

€160 in net VAT must be paid.

The second stage.

To the mine, the smelter has paid 200 euros in value-added tax (VAT), plus an additional 20 euros in VAT on other purchases, such as furniture and office supplies. So if the smelter sells €2000 worth of steel, it charges €2400, which includes €400 VAT, for the transaction. This means the smelter deducts his €220 in input costs and pays €180 to the government. A total of €180 from the smelter, plus €160 from the mine, plus €40 from the mine’s provider of tools, and €20 from the smelter’s supplier of furniture/stationary.

Supply: €2000.

Amount of VAT due on the purchase: €400

Purchases: €220 in VAT

There is a net VAT charge of €180.

The right VAT on a sale of €2000 is €400, which is the sum of the smelter’s payment of €180, the mine’s payment of €160, the supplier’s payment of €40, and the smelter’s payment of €20.

Taxes on goods and services

A standard VAT rate of at least 15% and a lower one of 5% are required under EU law (only for supplies of goods and services referred to in an exhaustive list).

Between EU countries and between specific products, the actual rates are different. Several EU countries, however, have decided to keep their own tariffs in place for particular products.

VAT authorities in EU countries are the best source of information on the current VAT rates for a certain product in a given EU country.

Look for translations of the URL in the previous paragraph.

EN•••. To get an overview of the various rates in all EU nations, consult the EU information sheet See if the preceding link can be found in any other language. EN•••. Look for translations of the URL in the previous paragraph. EN•••

More information about VAT rates can be found here.

You can look for translations of the previous link in other languages.

To what extent does the EU Commission have input in putting the EU VAT system into action?

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There are a few things the European Commission is responsible for: ensuring that the VAT Directive is applied correctly. Member States are responsible for enacting and enforcing these rules on their own territory through national legislation. When it comes to EU law, the Commission serves as “Guardian of the Treaties,” ensuring that national laws and practices are in compliance.

What is the procedure for calculating VAT in each of the EU member states?

The VAT Directive sets out common criteria for EU members to follow.

Find out if the previous linkEN••• has been translated into their native tongue. Each EU country’s actual applicability and administrative procedures are therefore unique.

More information about the country VAT laws

You can look for translations of the previous link in other languages.

Is it possible for the Commission to step in when the VAT Directive is being applied incorrectly?

The European Commission lacks the authority to intervene in the individual situations of individual taxpayers or to express an opinion based on factual findings.

A Member State may be subject to an infringement procedure initiated by the Commission.

Only the Commission and the Member States are deemed parties in this proceeding, excluding any one individual taxpayer from the equation. As a result, no one’s life is impacted directly by the results of this treatment.

If you have a specific problem, the only method to get help is to go through your country’s official channels of appeal. You may also use SOLVITSearch to see if the previous linkEN••• has any accessible translations.

Complaints are the subject of this section.

You can look for translations of the previous link in other languages.

See the topic-by-topic breakdown of the VAT rules for more information•••EN•••